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Is a Minimum Wage an Appropriate Instrument for Redistribution?

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  • Aart Gerritsen
  • Bas Jacobs
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    Abstract

    We analyze the redistributive (dis)advantages of a minimum wage over income taxation in competitive labor markets. A minimum wage causes more unemployment, but also leads to more skill formation as unemployment is concentrated on low-skilled workers. A simple condition based on three sufficient statistics shows that a minimum wage is desirable if the social welfare gains of more skill formation outweigh the social welfare losses of increased unemployment. Using a highly conservative calibration, a minimum wage decrease is shown to be part of a Pareto-improving policy reform for all countries under consideration, except possibly the United States.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-01/cesifo1_wp4588.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4588.

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    Date of creation: 2014
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    Handle: RePEc:ces:ceswps:_4588

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    Related research

    Keywords: minimum wage; optimal redistribution; unemployment; education;

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    1. Luttmer Erzo F.P., 2007. "Does the Minimum Wage Cause Inefficient Rationing?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 7(1), pages 1-42, October.
    2. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 17(2), pages 213-240, March.
    3. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, Elsevier, vol. 4(4), pages 335-342, November.
    4. Allen, Stephen P, 1987. "Taxes, Redistribution, and the Minimum Wage: A Theoretical Analysis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(3), pages 477-89, August.
    5. Palda, Filip, 2000. "Some deadweight losses from the minimum wage: the cases of full and partial compliance," Labour Economics, Elsevier, Elsevier, vol. 7(6), pages 751-783, November.
    6. David Autor & Alan Manning & Christopher L. Smith, 2010. "The contribution of the minimum wage to U.S. wage inequality over three decades: a reassessment," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-60, Board of Governors of the Federal Reserve System (U.S.).
    7. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 739-749.
    8. Coen N. Teulings, 0000. "Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox," Tinbergen Institute Discussion Papers 98-118/3, Tinbergen Institute.
    9. Mathis Hungerbühler & Etienne Lehmann, 2007. "On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”," Working Papers, Centre de Recherche en Economie et Statistique 2007-17, Centre de Recherche en Economie et Statistique.
    10. Kane, Thomas J, 1994. "College Entry by Blacks since 1970: The Role of College Costs, Family Background, and the Returns to Education," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(5), pages 878-911, October.
    11. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, Elsevier, vol. 31(1-2), pages 490-498.
    12. Petrongolo, Barbara & San Segundo, Maria J., 2002. "Staying-on at school at 16: the impact of labor market conditions in Spain," Economics of Education Review, Elsevier, Elsevier, vol. 21(4), pages 353-365, August.
    13. Nickell, Stephen, 1979. "Education and Lifetime Patterns of Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages S117-31, October.
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